Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.10 million (Fijian dollars, F$) worth of imports from Fiji in 90 days.Currently, the spot rate for the Fijian dollar is $0.53 per F$.Suppose that Retrojo negotiates a forward contract with a bank, which commits it to purchasing Fijian dollars at F$1,100,000.00 at $0.53 per Fijiandollar in 90 days. Thus, Retrojo knows with certainty that it will need F$1,100,000.00 × $0.53 per Fijian dollars = $583,000.00 for this exchange.Assume the Fijian dollar depreciates over this time period to $0.42 per Fijian dollar. If this were the case the, outside of the contract with the bank,only $(U.S. dollars) would be needed to exchange for the required F$1,100,000.00.

USD needed at depreciated rate= $462,000.00Explanation:Retrojo Inc. would need $462,000.00 (US…

Answered: Suppose that Retrojo Inc. is a U.S.…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

ChapterP2: Part 2: Exchange Rate Behavior

Section: Chapter Questions

Problem 1Q

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Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.90 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.56 per F$. (U.S. dollars). If If Retrojo were to exchange U.S. dollars for the required F$1,900,000.00 Fijian dollars, it would need $ Retrojo waits 90 days to make this exchange (perhaps due to insufficient funds on hand), and the Fijian dollar appreciates to $0.70 during those 90- days, then Retrojo would need $ (U.S. dollars). Thus, if Retrojo believes that the Fijian dollar will appreciate, it can its exposure to such exchange rate risk by locking in the original exchange rate through the use of a forward contract. reduce increase RE: 0/2 step)
Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.10 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.53 per F$. If Retrojo were to exchange U.S. dollars for the required F$1,100,000.00 Fijian dollars, it would need $ (U.S. dollars). If Retrojo waits 90 days to make this exchange (perhaps due to insufficient funds on hand), and the Fijian dollar appreciates to $0.64 during those 90- days, then Retrojo would need $ (U.S. dollars). Thus, if Retrojo believes that the Fijian dollar will appreciate, it can its exposure to such exchange rate risk by locking in the original exchange rate through the use of a forward contract.
Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$2.00 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.80 per F$. Suppose that Retrojo negotiates a forward contract with a bank, which commits it to purchasing Fijian dollars at F $2,000,000.00 at $0.80 per Fijian dollar in 90 days. Thus, Retrojo knows with certainty that it will need F$2,000,000.00×$0.80 per Fijian dollars =$1,600,000.00 for this exchange. Assume the Fijian dollar depreciates over this time period to $0.67 per Fijian dollar. If this were the case the outside of the contract only (U.S. dollars) would be needed to exchange for the required F$2,000,000.00.
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Blur Ltd, a UK importer, expects to make a payment of 1.8m Australian dollars (A$) for sure in one year from now. Blur will need to pay for the A$ currency in sterling (£). Assume that the Australian dollar’s spot exchange rate now is A$=£0.56, the one-year forward rate is A$=£0.59, and the discount rate is zero. Blur may need to pay an additional A$3.1m one year from now if it agrees a deal with a new Australian supplier, also payable in one year from now. The probability of this deal being agreed is 0.5. If the deal is not agreed (probability 0.5), Blur makes no payment to the new supplier. Suppose for parts (a) and (b) that the spot rate in one year is A$=£0.58. Assume Blur chooses to enter into a forward exchange contract for the maximum possible payment of A$4.9m. What actions will the firm take and what will be the value of its net payments in £, if in one year: the new deal is agreed? the new deal is not agreed? What will be the expected value of Blur’s net payment in…
If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: A. obtain a 90-day forward purchase contract on Canadian dollars. B. obtain a 90-day forward sale contract on Canadian dollars. C. purchase Canadian dollars 90 days from now at the spot rate. D. sell Canadian dollars 90 days from now at the spot rate.
Suppose that a US-based company is buying Chinese goods. Current exchange rate for Chinese Yuan is 0.15 USD. The price of goods is ¥13,000 per unit. The company is buying 800 units per year with a fixed contract for the next two years. Suppose that Chinese Yuan appreciate to 0.2 USD in the next year. The US importer will respond to this by lowering the demand to 600 units in the third year. What cash flow will be reflected on the balance of payments at the end of the third year? Your Answer:
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